September 21, 2012

Unhappy Valley: A Startup Party's Tinge of Gloom

On the surface, at least, last week’s TechCrunch Disrupt conference didn’t look like evidence that Silicon Valley’s perpetually hopeful start-ups are any less hopeful than ever. More than three thousand computer types paid around $3,000 each to pack a long warehouse in San Francisco's industrial-neighborhood-turned-tech-hub and hear—or make—pitches. Delivered with all of the I’ve-poured-my-soul-into-this-baby optimism you’d expect from participants in Northern California’s venture capital game, the sell goes something like this:

There is a massive problem in the field of [X]. The hidebound incumbents don't even realize it exists, leaving a fortune on the table for the person who finds a way to fix it. I am that person, here is my patent-pending technology, and this is why it's better than the eight other companies trying to do the same thing. All I need is $[Y] million to bring it to market. It's be the easiest billion dollars you’ll ever make.

As part of the conference’s Startup Battlefield competition, entrepreneurs perform for a tribe of investor pros repping the houses of Kleiner Perkins and Sequoia and DFJ, who put them through their paces with questions following the demos. When the exhibition concludes, the moneyed ones filter quietly through a convention floor full of concepts that didn't make it onstage, occasionally making notes, like racehorse buyers scoping out their next prospect. The founders seek attention any way they can, from shots of green sake to a bald guy dressed in a bridal gown.

Once in a while, eddies roil the crowd in the wake of passing politicians, who are drawn by the glow of youth and imminent wealth. San Francisco mayor Ed Lee talks up everything he's done to make the city a startup playground--to the point where others are starting to feel bumped off the swing set—and marvels that the lowest salaries seem to start at around $80,000. Newark mayor Cory Booker came through to launch a new video aggregation site aimed at young people. "It's wonderful to be in the entrepreneurship space," he says on stage, relaxing in jeans and a blazer, broadcasting to the vast floor of faces illuminated by open laptops that he is one of them.

Sure, local electeds have reason to be impressed: In places like the Valley, scribbles on napkins are getting funded at levels not seen since the last internet boom. A buzzy blog corps reports multi-million-dollar investment rounds every day, and glorifies the suddenly rich (at this conference, TechCrunch’s reporters scuttled around posting articles to the site before speeches had even ended). Entrepreneurs are on the hunt for ever-bigger industries to disrupt, figuring that every established way of doing business can be subverted with a smartphone, which lent the event a certain messianic flavor.

"I think the big corporations and the old ways, we're all sick of it," says Jessica Alba, the actress, who's promoting a line of eco-friendly baby products. "I think that's why we're all here."

So far, so good. Dubious claims to rebel cred are a constant in Silicon Valley. But stick around a bit and you sense something new and strange: A feeling of insecurity lying just beneath the bash's showmanship and pomp. There are rumblings that Silicon Valley is starting to burn itself up, with the competition for talent consuming cash at crazy rates. And more fundamentally, they're confronting the idea that all the blockbuster concepts have been taken, or will be, by a generation of giants that are actually pretty good at pointing out and chasing down the next big thing.

"I think that the fact that we have a more mature ecosystem does constrain the opportunities that startups can go after," says David Sacks, who recently sold his business-oriented social networking startup to Microsoft for $1.2 billion. He'd advanced the theory a few weeks ago in a hotly-debated Facebook post, and defended it on stage against an indignant interviewer who kept reading quotes from people predicting the end of innovation throughout history. "If we're in a baseball game, we're probably in the fourth inning," Sacks insisted. "It's just not the beginning anymore."

Sacks may be wrong that the era of transformative ideas has passed. But it is true that the pitches in the Valley are starting to seem…a little predictable. Most startups do appear to be variations of somebody else's game-changing business model, best explained through a simple X-for-Y analogy: We're Zillow for rentals! Evernote for women! Kickstarter for concerts! Cafepress for seasonings! Some of the more derivative concepts try to get acquired by the big dogs, who may or may not be interested—Travis Kalanick, CEO of the super-hot taxicab app Uber, spoke almost derisively of turning them away (while rolling out new services to compete with the few companies that have gained traction).

And ultimately, you have to wonder whether each person’s app capacity has an upper limit when there are apps to organize your apps, and merge them more seamlessly with your brain. "The 'do' paradigm is the next frontier of the 'search' paradigm," proclaims the CEO of Maluuba, a voice recognition service that will spit out some result having to do with a question you might ask a smartphone (it’s Siri, for Android).

These concepts are clever, and perhaps even technologically advanced, but only marginally useful for the kind of wired urbanites who live within a 50-mile radius of the conference floor. And the question of how they'll make money always seems to come later, if at all. Most are free to users, banking on faith that once you become popular enough, there must be some way to generate revenue—either through selling advertisements or data about consumer behavior. "We feel that we have lots of options in the future," says a cheerful Shlomo Blass, representing a Facebook feature that allows people to rank their friends' character attributes.

Blass' confidence was somewhat forced. There’s a palpable fatigue around Facebook-y new concepts, which seem to be the easiest to come up with. “I don't know that I’m seeing a whole lot of new social networks,” says Kevin Rose, a partner with Google Ventures. “Every time there's a new app that requires me to re-do my friend graph, it's just a nightmare.”

Meanwhile, the one that was supposed to demonstrate that the social networking profit model could work—Facebook itself—has taken a massive beating in the marketplace since going public back in May.

For another ominous reminder of gravity, conference attendees need only look across the street at the dog logo-emblazoned offices of the gaming company Zynga, whose fortunes are tightly bound up with the social media giant through which it operates. It’s been hemorrhaging top executives, while its stock plunged 70 percent since a public offering last December. (Of course, most companies aren’t quite so directly associated in people's minds with Facebook. But there are other high-profile sources of social gloom, too--Groupon rounds out the droopy trio, leading some analysts to wonder whether networks are really the money gushers they’ve been made out to be.)

Having let down a nation of founders following his lead—and, so far, lost a pile of their money—Mark Zuckerberg had a lot to prove when he took the stage for his first public appearance since the company's disastrous IPO. Sitting ramrod straight, chuckling nervously at the moderator's jokes, Zuckerberg talked with the speed of a debater on the clock, perhaps having practiced in the mirror beforehand. He gave the reproachful nerds what they wanted, admitting that the sagging share price was affecting employee morale, and explaining why it had taken the company so long to adapt to the format they all figured was the future—smartphones—and how they were getting there fast.

At the end, the interviewer asked Zuckerberg if he was still having fun.

"For me it's not really about fun, it's about the mission," the boy mogul replied earnestly. His audience applauded, reassured that Zuckerberg was hard at work fixing the leaks in the boat they're all in together.

Disclosure: The New Republic's Publisher and Editor-in-Chief Chris Hughes was a co-founder of Facebook and worked at the company through 2007. He remains a shareholder.